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Parallel Energy Trust 2013 Outlook

In 2012, Parallel hit investors with one big headache after another. A
host of challenges faced during the year took a heavy toll on the share
price which fell below $4 down from a $9 yearly high. Now that the long
anticipated dividend cut is in, where does Parallel go from here? Let’s take a look at the numbers.

Between its operational challenges and the collapse of liquids
pricing in its area of operations, the company ended up cutting its
distribution by 38% to $0.05 per share from $0.08. Parallel Energy is
finally on the road to recovery but it’s going to be long road in my
opinion.
Parallel Energy announced a 2013 budget of $14.5 million for 2013
with production forecasted to average between 7,200 and 7,400 boe/day
for the year. Let’s go with the lower end of the range as a conservative
estimate and based on past performance:

Average annual production of 7,200 boe/d

Annual production mix to average 25% condensate, 36% NGLs and 39% natural gas

Forecasted cash flow of $49 million based on

US$90.00 per bbl WTI, US$4.00 NYMEX natural gas price and an average NGL price of 45% of WTI

According to the company, this level of distribution provides for a
basic payout ratio of approximately 65% and an all-in payout ratio of
approximately 95% at the low end of the Trust’s production guidance for
2013, utilizing current forward strip prices.
I think the price of natural gas is a little bit optimistic, I would
go with $3.50 NYMEX for 2013 which bumps the basic payout ratio to 68%.
However, the all in payout ratio of 95% is no longer on the menu as you
can see.

Close but no cigar!

The guidance provided by the company is a projection into 2013 just
like this balance sheet you see in the screenshot above. Results will be
a function of actual realized commodity prices assuming no operational
hiccups. This means that the numbers above provide a pretty good
snapshot on how the company financially looks like in 2013.
Parallel Energy mentioned their intention to pay down debt by $10
million in 2013 “from excess cash flow over capital expenditures and
distributions and through selective use of the Trust’s DRIP programs.”
But from the looks of it, it won’t happen. At least not at this level of
DRIP going forward (since Premium DRIP has been cancelled, the company
expects 10-12% rate of participation.)
The flaw in the company’s model lies in the price of natural gas,
$4/mcf NYMEX might not materialize in 2013. Remember, when it comes to
natural gas, the weather will have the last word and so far winter in the north-east has been mild.Last time I discussed PLT,
my estimate was for a deeper cut down to $0.48 rather than $0.60. At
that level, Parallel Energy would have been able to earmark more than $8
million to paying down debt at $3.50/mcf NYMEX. The fact that the stock
price is trading below $4 after the dividend cut should not
be surprising.
I believe there are a few reasons the stock is yielding 15%. The yield is reflecting the following risks/variables:

Management needs to win back investor confidence

Management needs to deliver on execution

Downside risk in the price of WTI oil (right now it’s less than the budgeted $90)

Natural Gas prices might not reach $4.00/mcf in 2013

Debt to Cash flow above 4.4x

Going forward the company needs to focus on delivering what it
promised with no operational hiccups. Parallel needs to improve its
image as much as its balance sheet – they’re both of equal importance.
A improvement in realized commodity pricing or better well
productivity would certainly help. NGLs are budgeted at 45% of WTI
whereby they sold at 55% a year ago. However, forecasts call for a
recovery in 2014 rather than in 2013. As for well productivity, the
company is currently budgeting IP30 rates of 30 boed per well. If they
report better IP30 rates, that would certainly help the bottom line as
well.
The company enters 2013 with 3 positive points:

60% of estimated net revenue for 2013 is hedged

Very low decline rate in production: ~8%

The CEO is out of the picture

The dividend cut is a step in the right direction but it’s only the
beginning of what is most likely a very long road to recovery. In this
risk off environment, the dividend might not be in danger this year but
capital gains potential is in my opinion extremely limited. Obviously,
investors need to keep a close eye on realized commodity pricing during
2013 as our scenario is only a snapshot of the future.You can run your own financial scenarios using Oil & Gas Analysis software at oilandgas-analysis.com where you can register on for free. What do you think of PLT?Article Source: Beatingtheindex